(Bloomberg) — The world’s biggest bond market extended its May rally after a cooldown in the Federal Reserve’s preferred inflation gauge reinforced hopes officials will cut rates this year. A tech rout dragged down stocks.
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Treasuries headed toward their best month in 2024 as the so-called core personal consumption expenditures price gauge came in line with estimates, while posting the smallest gain this year. What’s more, spending unexpectedly dropped. For a data-dependent Fed, the report was seen by traders as “not quite as bad”, “slightly constructive” and “marginally dovish.”
That perception was clearly reflected on market trading Friday.
Bonds climbed across the US curve, with swaps signaling at least one Fed cut this year. However, stocks gave up initial gains — amid a selloff in the S&P 500’s most-influential group — and as concern about a consumer slowdown hitting earnings overshadowed bets on monetary policy easing.
“While we don’t necessarily want to see a weakening consumer, softening retail spending should help stoke the flames for lower rates in the second half of 2024,” said Bret Kenwell at eToro. “We’re not there yet, but the inflation reports were a constructive first step.”
US 10-year yields fell four basis points to 4.51%. The S&P 500 dropped to around 5,200, led by losses in tech. All megacaps retreated. The Nasdaq 100 slid 1.7%. Dell Technologies Inc. tumbled 22% as its revenue increase wasn’t enough to impress investors with high expectations for the AI server business. The dollar slipped.
Treasury yields have declined since the start of May, leaving US bonds on course for is best month this year, as measured by a Bloomberg index.
The so-called core PCE, which strips out the volatile food and energy components, increased 0.2% from the prior month. Inflation-adjusted consumer spending unexpectedly fell 0.1%, dragged down by a decrease in outlays for goods and softer services spending. Wage growth, the primary fuel for demand, moderated.
“Markets see inflation on a slow, but steady path lower,” said Quincy Krosby at LPL Financial. “The question is still how much more the Fed needs in terms of slower inflation before initiating an easing cycle.”
To Chris Larkin at E*Trade from Morgan Stanley, investors will have to remain patient.
“The Fed has suggested it will take more than one month of favorable data to confirm inflation is reliably moving lower again, so there’s still no reason to think a first rate cut will come any earlier than September,” he noted.
Overnight index swap contracts tied to upcoming Fed policy meetings continue to fully price in a quarter-point rate cut in December, with the odds of a move as soon as September edging up to around 50%. For all of 2024, the contracts imply a total of 34 basis points of rate reductions, up slightly from the close on Thursday.
“Today’s PCE report suggests to me that disinflation is back on track after anomalies exaggerated price pressures in the first quarter,” said Ronald Temple at Lazard. “It could be the beginning of a process that leads to easing in September.”
While the PCE data will likely be welcomed by the Fed, the core gauge has still risen at an annualized rate of 3.5% in the last three months, according to David Donabedian at CIBC Private Wealth.
“So, it’s way too early for any sort of victory lap for the Fed,” he noted.
In fact, inflation may not return to the US central bank’s 2% target until mid-2027, according to research from Fed Bank of Cleveland.
That’s because the inflationary impacts of pandemic-era shocks have largely resolved and the remaining forces that are keeping inflation elevated are “very persistent,” Cleveland Fed economist Randal Verbrugge wrote in a report Thursday.
Another aspect is that consumer spending in the first month of the new quarter slowed as real disposable incomes fell, remarked Jeff Roach at LPL Financial.
“Businesses need to prepare for an environment where consumers are not splurging like they were last year,” he noted.
“We are in a be-careful-what-you-wish-for moment because if slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets,” said
To Chris Zaccarelli at Independent Advisor Alliance, markets are in a “be-careful-what-you-wish-for moment.”
“If slowing consumer spending leads to lower inflation and the Fed is able to cut slowly as a result then that will be good for markets,” he said. “However, if consumer spending – and the economy – slows too quickly then corporate profits and stock prices will go down much more quickly than the Fed will be able to cut rates, so we would be careful at this point.”
Wall Street Reacts to Inflation Data:
Investors have been hoping that the bout of inflation we saw early in the year would fade, and that seems to be playing out.
The PCE data confirms price increases aren’t as sticky as feared, keeping hopes of at least one rate cut on the table.
April PCE data was a welcome relief after a string of hotter than expected inflation data in Q1, with headline and core inflation coming in as expected.
So the overall inflation outlook looks good, with disinflation in the pipeline, and that likely keeps the Fed on track to cut twice this year starting in September.
Yields fell in response to the PCE data only because there was no surprise with the data in line. Maybe too with the slightly less than expected spending figure as REAL spending was down a touch.
Overall, the April PCE report is marginally dovish. We needed to see more progress in disinflation to argue for multiple rate cuts in 2024.
Good news, right? Not quite. April inflation was better than March; still not good enough.
Inflation progress in April was not yet good enough to start the clock on the three month-type downshift we think is needed for the Fed to cut.
Corporate Highlights:
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Carl Icahn has amassed a sizable position in Caesars Entertainment Inc., according to people familiar with the matter, raising the prospect of a fresh tussle with the US hotel and casino operator.
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Hedge-fund manager Bill Ackman is selling a stake in Pershing Square as a prelude to a planned initial public offering of his investment firm, according to a person familiar with the matter.
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Gap Inc. reported better-than-expected results and raised its outlook for the full year, showing the apparel retailer’s bid to rebuild the business is moving forward.
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Penn Entertainment Inc. soared after an activist investor called for the sale of the casino company, saying a failed deal and growing pattern of guidance misses have damaged management’s credibility.
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Moderna Inc. gained US approval for its RSV vaccine in older adults, giving the biotech company a second product as it seeks to move beyond its reliance on the fading Covid-19 market.
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Hess Corp. shareholders approved the company’s proposal to be acquired by Chevron Corp. for $53 billion by a razor-thin majority of 51% of shares outstanding.
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.7% as of 12:11 p.m. New York time
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The Nasdaq 100 fell 1.7%
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The Dow Jones Industrial Average was little changed
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The MSCI World Index fell 0.4%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0841
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The British pound was little changed at $1.2724
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The Japanese yen fell 0.3% to 157.24 per dollar
Cryptocurrencies
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Bitcoin fell 2.4% to $66,855.41
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Ether fell 0.2% to $3,728.63
Bonds
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The yield on 10-year Treasuries declined four basis points to 4.51%
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Germany’s 10-year yield advanced one basis point to 2.66%
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Britain’s 10-year yield declined three basis points to 4.32%
Commodities
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West Texas Intermediate crude fell 0.8% to $77.25 a barrel
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Spot gold fell 0.5% to $2,332.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
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